Universal Basic Income — A preliminary assessment

The idea of a Universal Basic Income has resurfaced within the political and economic lexicon. It’s origins can be traced as far back as Gaius Gracchus in ancient rome, since which John Stuart Mill, Richard Nixon and Elon Musk have all played around with various iterations of the idea.

As a concept it is reasonably simple; each individual is entitled to claim an annual income, paid out by the Government of the day, without any conditionality attached. It’s function is to ensure a minimum standard of living for all citizens in a state, an end to absolute poverty. The initial expense would, in theory, be quickly recouped by the lower cost of negative externalities that are associated with low incomes and poverty; fewer crimes, less reliance on predatory lending, and higher rates of worker productivity.

The extent to which this works in reality is up for debate. It is true that trials have tested the effect of UBIs in a number of different settings. Unconditional cash transfer schemes trialled across a couple of poor communities in India improved recipients health and nutritional standards. A similar project in Namibia resulted in recipients engaging more in micro-finance projects. Policy inference is limited though with the majority of these basic income trials confined to developing economies. The most relevant trial took place in Manitoba province in Canada in the 1970s. The trial ran over budget very quickly (an early give away to the shortcomings that many critics point to) but the results were significant; hospitalisations, accidents, injuries and mental health issues had all declined, children stayed in school longer, mothers took more time off for maternity leave, and most importantly there was no decline in aggregate working hours (people continued to go to work and earn a wage).

In reality these results will be redundant after Finland reports the findings from their (currently ongoing) UBI trial. If successful, there will be solid quantitative evidence that basic incomes can work on a large national scale in a developed western economy. Until the results are released therefore, it would be premature to dismiss UBI as an unworkable policy. However, in the meantime it is worth establishing a theoretical basis for why I expect UBI would not work in the modern British economy.

Firstly, regardless of results, any scaled up basic income programme would be hugely expensive. Assuming each household in the UK (approximately 25 million) was paid £19,000 (roughly 60% of median income for a family with two children), the total bill for the Government would be £475 billion. Such a programme would also include handing £19,000 to 93% of the country who have incomes above that level. Reducing the rate of UBI for childless households and single individuals would not reduce the total cost significantly, and of course any reduction would reduce the positive effects on recipients.

The introduction of income conditionality to a UBI programme may reduce the cost and increase the notion of equity and fairness, but it builds in negative work incentives for recipients. Any basic income programme theoretically reduces incentives to work at the bottom of the wage scale. An individual who earns minimum wage working a 40 hour work week, and is then offered the same amount of money for no work, would quickly reduce total hours of work in favour of leisure. A taper rate of 100% would eradicate any incentive to earn at or just above the basic income rate. Even introducing a more generous taper rate of 35% (a conditionality in itself) would reduce the incentive to increasing total hours of work higher up the income scale. It is worth noting here, that the effect of UBI on Finnish employment, hours worked and wage levels is one of the most eagerly anticipated results from Finland’s trial.

Outside of the theoretical cost and impact of a universal basic income, the premise of the policy (reducing extreme absolute poverty), sits on shaky ground. Work completed by the Centre for Social Justice between 2006 and 2010 found poverty was a much more complex phenomenon than the notion it was a simple function of income. Conventional thinking prior to this period was that poverty can be tackled by putting more money into someone’s account. After 40 years though of cash based targeted spending in the US (the so called War on Poverty) and UK, with little improvement in poverty rates, this theory is highly questionable. According to the CSJ there are five socio-economic drivers of poverty; educational attainment, family dysfunction, unemployment, debt and addiction. Unless policy makers address instability within the family, problems with debt, addiction and low educational attainment, poverty will persist, regardless of a basic income or not.

Aside from the primary premise that a UBI will reduce poverty, recent discussion around the policy have used job automation and the threat of secular unemployment as another premise for introduction. The theory is that automation and increasing digitisation of production (predominantly in the manufacturing sector) will result in fewer and fewer jobs available across the income scale and skills landscape. This of course was the same argument made by textile workers in the 19th century who felt that mechanised cotton mills would destroy their jobs and way of life. What they did not correctly predict was that while their current jobs did become redundant, the increase in capacity and efficiency within the textile industry would give rise to both the fashion industry and clothes retail sector that now employs over half a million people across the UK. Robots in factories may destroy jobs related to machine management but new jobs will be created in artificial intelligence and software. This is not to mention new industries emerging around the products that robots will be able to manufacture at a greater speed, lower cost and higher specification.

So, UBI could distort labour markets, may be less effective in tackling poverty than previously thought and has been presented as a solution to a problem that almost certainly does not exist. However even if none of these theories materialise, UBI would not exist in a political vacuum. The political reality is one where there is unlikely to be appetite for such a radical welfare reform. Universal Credit is being rolled out with cross party support. It is designed to provide support to those most in need but maintains many of the incentives that get people out of poverty and into work. Incomes are increasing at a faster rate than inflation, inequality is falling and employment rates are at an all time high. The economic need for a massive injection of money into the economy is not there. Nor does a cash for nothing programme have the popularity to be carried through parliament and into law. The British people have always taken a compassionate view towards helping the least advantaged in society, but a dim view of a something of nothing society. UBI is, if anything, a something for nothing cash transfer programme. A referendum on the question of introducing a basic income programme in Switzerland resulted in a 77% to 23% vote against introduction.

Finland’s basic income trial will go on for two years, after which it may take another two years to gather all the data on health and poverty outcomes to measure the effectiveness of the programme. It may therefore be 2020 or 2021 before we have a hard piece of quantitative evidence on UBI. By then of course, we will have a better body of work identifying the effect of automation on manufacturing and Universal Credit will have been fully rolled out nationally. Any efforts to enforce a UBI programme in the UK before then is both impractical and nonsensical.

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